How mystery man scared China bank off Ping An deal

LingHuawei

ZhangYuzhe

BEIJING (Caixin Online) — When a high-profile, billion dollar deal for a stake in a Chinese insurer was inked in early December, officials at the country’s biggest policy bank were asking one question seemly unrelated to the transaction:

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The mysterious Xiao, a mainland Chinese financier, gave CP part of the cash for the first payment in the deal by tapping three municipal commercial banks in northern China with whom he enjoys close ties.

However, a rule made by the China Insurance Regulatory Commission (CIRC) in effect since 2010 bars the use of bank loans and other non-proprietary capital to acquire a stake in an insurance company. The rules also say neither an individual nor an institution can serve as a trustee holder of an equity stake in a Chinese insurance company.

Xiao’s maneuvering put in question the legality of the deal and prompted CDB to cancel the loan in December. After the policy bank’s decision was published by Caixin on Jan. 8, the stock prices of Ping An dropped by 3.73% on the Shanghai Stock Exchange and 4% on the Hong Kong bourse.

CDB’s move left CP with no choice but to scramble for new financing, raising worries that it would not have enough time to salvage the deal under the Feb. 1 deadline set by CIRC. However, CP said it could get enough funds from branches in 15 countries.

Meanwhile, the seller, London-based bank HSBC
0005, +0.07%US:HBC
issued only a short statement at the request of the Hong Kong Stock Exchange on Jan. 10 that said it had nothing to add to its December announcement that it was canceling the loan.

CDB’s red flag

Two documents issued by Ping An in December revealed CDB’s role change in helping CP finance the deal totaling $9.4 billion, or HK$72.7 billion.

Two days after Ping An announced the CP-HSBC deal, the insurer issued a report explaining the change to investors. The report said that the first payment of HK$15.2 billion for a 3.5% stake had been paid.

A second tranche, for a stake of more than 12%, was to be financed by cash and loans from CDB’s Hong Kong branch and needed approval from CIRC.

But soon after the deal was announced, investors in Beijing began to say that part of the money for the first tranche came from Xiao. The top management at CDB asked about Xiao’s background and quickly called off the loans.

The bank’s headquarters in Beijing issued a risk warning to its Hong Kong office, and reported to CIRC.

Xiao is a 42-year-old native of Shandong Province whose company, Tomorrow Holdings, controls several public companies and a number of financial institutions, including banks, securities firms and trust companies. Caixin published a report on Dec. 24 that said that banks in three cities were ordered by Xiao to wire money for the first part of the of CP-HSBC deal.

Tse Ping, vice chairman of CP group, said on Dec. 25 that he knew Xiao, but Xiao was rejected after showing interest in being part of the deal. Tse also said the company still hoped to receive loans from CDB.

A report issued by Ping An on Dec. 31 on changes to its equity structure no longer mentioned loans from CDB’s Hong Kong branch. Instead, the report said that four subsidiaries of CP would use their own money to buy the stake in Ping An.

The planned loans to CP were a significant amount to CDB’s Hong Kong branch, which had outstanding loans of HK$300 billion in 2012. Established in 2009, the branch has extended one-sixth of CDB’s total foreign-currency-denominated loans.

CDB summoned the chief of Hong Kong branch, Liu Hao, a strong supporter of the deal, to Beijing to explain the matter in writing. The 40-year-old Liu resumed his post Jan. 7 after the trip, but the incident might limit his chances at promotion.

An investigation by CDB found problems with the procedure used to agree to make the loans to CP loans. It said the Hong Kong system wasn’t well connected to headquarters, but corruption was not involved.

CP is no stranger to CDB. The Thai company, which focuses on agriculture, retail and telecoms, enjoyed more than 100 billion yuan ($16.1 billion)
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in credit from CDB for its agribusiness. CP’s vice chairman, Tse, said the company did not tap the line of credit before it expired in February 2012.

Scrambling for financing

In the fall of 2012, HSBC talked with several potential buyers as it planned to unload its stake in Ping An. Singapore’s sovereign fund, Temasek Holdings, asked for a 50% discount on the market price. However, CP offered a small premium over Ping An’s share price in Hong Kong, which is more than 15% higher than Ping An’s share price in Shanghai.

HSBC chose the higher bid, and hastily signed the deal without performing due diligence.

“We agreed to sell to CP mainly because our lawyers reviewed its loan agreement with CDB,” a source from HSBC said.

In September, CP set up four branches in the British Virgin Island as vehicles to purchase part of Ping An. Together they had a mere $200,000 in registered capital.

However, Ping An’s Dec. 31 report said the CP subsidiaries now had $10.5 billion, more than the required $9.4 billion for the deal.

However, it was difficult to verify the validity of the registered capital. In China, registered capital would be checked by the government by looking at the company’s bank account. But under BVI supervision, a company doesn’t need to disclose the information and the government won’t verify it.

CP Group had total income in 2011 of $546 million and total assets of $6.2 billion. This puts into question the source of the more than $10 billion in capital claimed by the four subsidiaries.

Tse said CP Group can move funds from branches in 15 countries, and many banks had expressed interest in financing the deal.

Brokerage and investment research firm CLSA said the troubled deal may eventually force HSBC to look for another buyer.

Deutsche Bank said in a report that CP would seek financing through other means and also try to clear up doubts about its acquisition. It added that the proposed transaction had only a limited impact on Ping An’s fundamentals and the decline of the insurer’s share prices wouldn’t last.

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